Deck 5: Overview of the Audit Financial Reports

Question 1

The Corporations Act requires that auditors are competent.To be suitably qualified the person must:

A)be a fit and proper person to be registered as an auditor.
B)be a member of CAANZ, CPA Australia, the Institute of Public Accountants or other prescribed body.
C)hold a degree, diploma or certificate from a university or other prescribed body.
D)all of the above.

Answer 1

D

Question 2

The work of an internal auditor can be used to complement, but not substitute for, the work of the independent auditor.Which of the following factors is not one of the considerations listed by ASA 610 that is relevant in determining the effect of an internal auditor's work on the audit?

A)Past communications of the internal auditors with management.
B)The organisational status.
C)The scope of the work.
D)Technical training and proficiency of the internal auditor.

Answer 2

A

Question 3

The Australian Securities Exchange (ASX):

A)requires all listed companies to have an audit committee.
B)requires the Top 300 companies to have an audit committee.
C)recommends but does not require listed companies to have an audit committee.
D)requires all listed companies with a capitalisation of more than $200 million to have an audit committee.

Answer 3

B

Question 4

Which of the following is not a benefit arising from having the financial reports audited?

A)Auditors suggest how controls can be improved.
B)Auditors suggest how greater operating efficiencies may be achieved.
C)Audits have a favourable effect on employee efficiency and honesty.
D)Audits provide access to less favourable borrowing terms.

Question 5

The body that prepares the auditing standards that apply in Australia is:

A)the ASIC.
B)the AASB.
C)the IFAC.
D)the AUASB.

Question 6

An auditor must be registered:

A)by the ASIC.
B)by the Financial Reporting Council.
C)through CPA Australia, CAANZ or the Institute of Public Accountants.
D)by the AUASB.

Question 7

It is regarded as best practice in regard to the composition of audit committees to:

A)have an executive director as chairperson.
B)have the internal auditor as a member.
C)have the external auditor as a member.
D)none of the above are regarded as best practice in regard to the composition of audit committees.

Question 8

As a general rule, the auditor is appointed by the shareholders at the annual general meeting.Which of the following is not true concerning the appointment of an auditor?

A)In practice the shareholders generally accept the recommendations of the directors concerning the appointment.
B)The appointment stands for 12 months until the next annual general meeting.
C)The company is liable to pay reasonable fees and expenses of the auditor.
D)An auditor ceases to hold office after a company goes into liquidation.

Question 9

The group which has the legal responsibility for removal of the auditor is:

A)management.
B)the shareholders.
C)the audit committee.
D)the board of directors.

Question 10

The primary reasons for the existence of Auditing Standards is:

A)they provide assurance of the minimum standards that should have been employed by the auditor in arriving at the opinion.
B)they are necessary to maintain a cost-effective service.
C)they will safeguard the auditor when they are sued.
D)all of the above.

Question 11

The Corporations Act does not require the audit of which of the following type of entity, except in specified circumstances?

A)A small proprietary company.
B)A public company.
C)A government company.
D)A large proprietary company.

Question 12

Audit committees are perceived to strengthen the independence of auditors.Which of the following is normally an objective of an audit committee?

A)Ensuring that the entity operates in the best interests of the shareholders.
B)Assisting the board of directors to discharge its responsibility to exercise due care, diligence and skill.
C)Giving advice on the selection of the board of directors.
D)All are objectives of an audit committee.

Question 13

S.308 of the Corporations Act requires certain implied conditions to be reported on in an audit report if there is any deficiency, or failure to comply.Which of the following is one of those implied conditions?

A)Whether the auditor has obtained all information, explanation and assistance required.
B)Whether an audit has been carried out.
C)Whether the auditor is independent of the company.
D)Whether the financial statements are properly drawn up so as to give a true and fair view of the company's financial affairs.

Question 14

Which of the following is not an inherent limitation of an audit?

A)Audit testing of selective samples.
B)Forming professional judgements in highly specialised areas.
C)Time lapse between the balance date and the presentation of the audit report.
D)All are inherent limitations.

Question 15

The removal and resignation of auditors must be:

A)by resolution of the company.
B)with special notice to the ASIC for its consent.
C)both the above.
D)none of the above.

Question 16

An engagement letter contains express or implied terms of the contractual arrangement with the client.Which of the following is not one of those terms?

A)To exercise a reasonable degree of skill and care.
B)To report the duties of the auditor.
C)To be independent of the company.
D)To give an opinion on the truth and fairness of the financial statements of the company.

Question 17

Which of the following is a benefit of the ASIC register of company auditors?

A)The register contains a code of ethics that auditors must follow.
B)The register provides assurance of the qualification, level of competence and experience of the auditor.
C)The register facilitates disciplinary procedures against auditors.
D)All of the above are benefits.

Question 18

Who is responsible for the appointment of the auditor to a company?

A)The Australian Securities and Investment Commission.
B)The audit committee of the company.
C)The members of the company.
D)The managing director of the company.

Question 19

The words that best describes the relationship which should exist between the external auditor and the management of the client company are:

A)mutual trust and respect.
B)advocacy of management's position.
C)skeptical vigilance.
D)adversarial relationship.

Question 20

When auditors issue an audit report that expresses an audit opinion what duty are they fulfilling?

A)The duty to use reasonable care and skill.
B)The duty to be independent.
C)Statutory duty to report to members and to ASIC.
D)A procedural duty.

Question 21

List the requirements necessary for an individual to become a registered auditor.

Question 22

Identify and explain two duties of an auditor.

Question 23

Identify and explain two of the benefits of having audited financial statements.

Question 24

ABC Ltd recently established an audit committee in compliance with the Australian Stock Exchange listing requirements.The committee is made up of Ian Wright, John Small and Todd Smith.Ian is an executive of the company and has worked his way up from a factory worker through to management.Ian is the chairperson of the audit committee.John is not a member of management and is therefore a non-executive director but he does serve on a number of boards.John's background is in accounting and before he became a director he was the CFO of a large corporation for many years.Todd is the chairperson of the board of directors and is an executive of the company.Todd's background is in manufacturing and he has been with the current company for 5 years.The committee has just completed having its formal charter drawn up which details its rights and responsibilities.
Identify the strengths and weaknesses of ABC Ltd's audit committee.

Question 25

For each of the following groups explain the relationship with the auditors and how they may interact.
$\bullet$ The shareholders
$\bullet$ The board of directors and the audit committee
$\bullet$ Internal auditors
$\bullet$ Management.

Question 26

During phase I of the audit, the auditor performs risk assessment procedures.Which of the following is not one of the tasks undertaken during this phase of the audit?

A)Understand internal control.
B)Assess the risk of material misstatements.
C)Develop preliminary audit strategies.
D)Make decisions about materiality.

Question 27

Place these phases of an audit in chronological order: A.Assess the risk of material misstatement
B)Respond to assessed risks
C)Perform risk assessment procedures
D)Evaluate audit evidence

A)A, B, C, D.
B)C, A, B, D.
C)A, C, D, B.
D)D, C, B, A.

Question 28

Which of the following is part of phase III of the audit process, which is responding to assessed risks?

A)Determine the nature, timing and extent of audit tests.
B)Conduct tests of controls.
C)Assess the risk of material misstatement.
D)Identify significant inherent risks.

Question 29

Identify and explain two of the limitations of audited financial statements.

Question 30

In a financial statement audit, the auditor maintains professional relationships with:

A)the board of directors and ASIC.
B)the audit committee and the internal auditors.
C)management and the professional accounting bodies.
D)shareholders and creditors.